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Following its earnings call yesterday Oracle Corporation (ORCL) stock is trading downward as of the writing of this post. However, shares of its competitor Adobe Systems Incorporated (ADBE) soared earlier this week following its earnings release. Our earnings analysis of these two stocks suggests that Oracle might be faced with declining growth while Adobe could be a turnaround story. We compare these companies to their competitors (see the end of this post for the peer list we used) and address questions around valuation drivers, growth and investment strategy. This post focuses on Oracle Corporation. For a full transcript see: Oracle Corporation's Q1 2014 earnings discussion. We will shortly publish an earnings analysis of Adobe Systems Incorporated as well on our blog.

Oracle Corporation Earnings Analysis

The table below shows the preliminary results along with the recent trend for revenues, net income and returns for Oracle Corporation for the quarter ended 8-31-2013.

Quarterly (USD million)2013-08-312013-05-312013-02-282012-11-302012-08-31
Revenues8,372.010,947.08,958.09,094.08,181.0
Revenue Growth %(23.5)22.2(1.5)11.2(25.1)
Net Income2,191.03,806.02,504.02,581.02,034.0
Net Income Growth %(42.4)52.0(3.0)26.9(41.1)
Net Margin %26.234.828.028.424.9
ROE % (Annualized)19.834.623.223.918.7
ROA % (Annualized)10.418.912.613.210.5

Burdened by Asset Inefficiency?

Oracle Corporation's current Price/Book of 3.6 is about median in its peer group. The market expects less growth from Oracle Corporation than the median of its chosen peers (P/E of 14.6 compared to peer median of 23.2) and for its current rates of return that are around peer median (ROE of 25.4%) to decline.

The company's relatively high profit margins (currently 29.7% vs. peer median of 19.7%) are burdened by asset inefficiency with asset turns of 0.5x compared to the peer median of 0.6x. Overall, this suggests a margin driven operating model relative to its peers. Oracle Corporation's net margin is its highest relative to the last four years and compares to a low of 22.9% in 2010.

Long-term Growth Fading?

While Oracle Corporation's revenue growth has been around the peer median (11.5% vs. 11.5% respectively for the past three years), the stock's below peer median P/E ratio of 14.6 implies below median long-term growth as well. The market likely sees the company's long-term growth prospects to be fading.

The company's annualized rate of change in capital of 11.6% over the past three years is around its peer median of 11.6%. This median investment has likewise generated a peer median return on capital of 17.3% averaged over the same three years. This median return on investment implies that the company is investing appropriately.

Trend Charts

(click to enlarge)Quarterly Annual Revenue for Oracle Corporation

(click to enlarge)Annual Revenue for Oracle Corporation

Peers Used for Analysis

We compared Oracle Corporation to the following companies for our peer-based analysis today: Adobe Systems Incorporated (ADBE), SAP AG Sponsored ADR (SAP), Intuit Inc. (INTU) and Microsoft Corporation (MSFT).

Oracle Corporation items of possible interest: Key Valuation Items and PEG Ratios, Comparative Charts, Trend Charts, News, Alerts, Financials and likely dividend increase report.

Disclaimer

Source: Earnings Analysis For Oracle Corporation - Fading Growth?